IMF Ready to Help Ecuador on Dollarization

By Janet Guttsman

WASHINGTON (Reuters) - The International Monetary Fund on Monday promised Ecuador technical help as it seeks to replace its currency with the dollar, but stopped short of endorsing the decision or explaining how the plan might work.

Managing Director Michel Camdessus said in a terse statement that the IMF was ready to send a team to assess how the recession-hit Latin American country could change its bank and tax systems to cope with the introduction of the dollar.

``In light of the announcement yesterday by the government of Ecuador of its intention to move the economy to full dollarization, the IMF is prepared to send a fact-finding mission to Quito to provide technical assistance in adapting their fiscal and banking strategies to dollarization,'' Camdessus said.

``Once suitable measures are identified, IMF management looks forward to working with the authorities to support their economic program.''

IMF officials said the team would leave for Quito, the Ecuadorean capital, this week. Ecuador, mired in recession and facing soaring unemployment and plunging market confidence, announced its plan to abandon its battered currency, the source, on Sunday. The news took Washington by surprise and wrecked chances of a deal on an IMF loan -- viewed as key to debt rescheduling and other loans.

The IMF said late last week that it was making progress in long, drawn-out talks about a loan to Ecuador, and U.S. Treasury Secretary Lawrence Summers said the United States was ready to support the efforts of the international lenders.

``We have been following developments in Ecuador closely,'' Summers said on Saturday. ``The achievement of stability and confidence in Ecuador would be very much in the interest of the United States.''

The United States has traditionally said it has no objections to countries bringing in the dollar.

But they insist the Federal Reserve will not take other countries' needs into account when it sets interest rates for the United States -- or indeed for a dollar currency zone -- and Washington has responded coolly to suggestions that it compensate dollarizing economies for the loss of interest they currently earn on central bank reserves.

But at the same time, some officials admit countries may become less enthusiastic about keeping their own currencies in an increasingly globalized world.

``In the long run, with some of the problems with floating exchange rates, we will see more of a movement toward tight pegs or currency boards or currency blocs. The benefits of having your own currencies will be less obvious to many countries,'' IMF First Deputy Managing Director Stanley Fischer said last week.

Not A Good Candidate

But analysts said Ecuador, which has a fragile tax and banking system, might not be a particularly good candidate to introduce the dollar, and it would need to reform and stabilize its economy for the plan to work.

Michael Henry, economist for Latin America at ING Barings in New York, said Ecuador had enough central bank reserves to convert base money and liquid reserves to dollars, but that reserves would probably cover less than half of M2 -- cash, checking accounts and savings accounts.

``This is a political decision, and physically it is very difficult to implement,'' he said.

Ecuadorean President Jamil Mahuad said on Sunday that dollarization was Ecuador's best way out of its economic chaos. Ministers said the move would slash inflation and help Ecuador stabilize its recession-hit economy.

The IMF has been negotiating with Ecuador for months on an economic program that could be underpinned by an IMF loan. Finance Minister Alfredo Arizaga said on Monday that the dollarization plan meant Ecuador no longer needed IMF cash.